Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist
What happens in shops and online retailers across the country has a major influence on economic growth. Private consumption accounts for about 53%1 of economic growth, and retail sales comprises about one-third of that figure.
The retail sector is also a big employer across the country. In normal times it accounts for about 10% of all Australian workers, and almost one-third of employees aged 15 to 24 years2. It’s a bigger employer than construction, and education and training. In fact, it is the second largest employer behind health care and social assistance. In regional areas it is an even bigger employer, relative to other parts of the economy.
It’s a very important part of the economy and watching retail sales can help forecast economic growth.
Retail is one area of the economy where the news hasn’t always been positive during 2021. That’s not to say it’s been poor, but it just hasn’t been as headline grabbing as the surging employment market and this was partly because it had a surge last year and so a lot of spending was pulled forward. The most recent retail sales figures show that turnover rose 1.3% for the June quarter, which implies a real rise of around 0.7% solid gain in consumer spending.
But for the month of June, retail sales fell 1.8%. That was driven by Victoria’s lockdown early the month and the New South Wales lockdown late in the month. Of course, various lockdowns continued in July, and in New South Wales’ case is set to go beyond.
That pretty much ensures a further decline in July retail sales, albeit not as steep as seen in April last year because consumer confidence is holding up better, the whole country is not in lockdown and more retail activity has moved online.
Closures of outlets in Victoria, South Australia and New South Wales is expected to hit the retail sector hard, and the national economy is likely to have contracted during the current quarter.
The Victorian lockdown cost around $1 billion a week. The South Australian lockdown cost $280 million a week. In New South Wales, the largest state economy which accounts for one-third of Australia’s economy, the lockdown is expected to cost $9 billion based on an extension to end August, and still counting.
We had already revised down our September quarter GDP forecast to flat. Then we took it to negative 0.7% on the basis of NSW lockdowns would end mid-August. With the extension of the NSW lockdown its now likely that GDP will see an even deeper contraction.
It’s not all bad news. There are still reasons for optimism not just for the retail sector, but also the broader economy.
Victoria and South Australia showed that lockdowns can work against the Delta strain of coronavirus. And while the numbers in New South Wales are still rising the restrictions in New South Wales are also working in that we haven’t seen the explosion in numbers that have become commonplace overseas around the Delta variant.
The key to reducing the likelihood of future lockdowns is vaccinations. The United Kingdom has become a global test case and the evidence, at the moment, is that vaccines are 90% plus effective in preventing the need for hospitalisation and deaths.
The experience of last year has demonstrated repeatedly that once lockdowns end, economic activity rebounds, propelled in part by pent up demand. It has in Europe, the US, and last year in Australia.
Also, the threat posed by the Delta variant will add pressure for more fiscal stimulus and easier-for-longer monetary policy. It will increase pressure in the US to pass President Joe Biden’s $US4 trillion, eight-year American Jobs and Families Plan.
And finally, the pace of vaccinations in Australia is ramping up quickly, with over one million jabs a week. At this rate, around 60% of Australians should be vaccinated by the end of the year, and 80% by March 2022.
Keep an eye on retail sales. They will act as a barometer of economic health.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.